Institutions are back at the feeding trough

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

Just as soon as they pulled back from the feeding trough last week, institutions had a change of heart, jumping back into shares with gusto. The result was a respectable, three-day Nasdaq rally, leaving the index less than 0.5% from a 52-week high, as of Monday's close.

Of import was the ability of price to open near the day's low and go out near the day's high in all three sessions.

Chartists will note that volume diminished from that of the prior day on each of the three days up. The significance of this is zero, as a market that is sold out will move up due to the vacuum of sellers, not an abundance of buying pressure. This is a reason why the O'Neil follow-through day concept ignores the first three days off of a low, preferring to begin the analysis on day four.

In the current situation, the Nasdaq only declined 4.4% intraday from the Oct. 1 peak. Hence, the medium-term trend never went from up to down, obviating the value of seeing a follow-through day.

Because the pullbacks were so minuscule to begin with, it is not so important to see volume expand into something meaningful when the price of some of the leaders hits new turf out of one- and two-week staging areas.

These reports have discussed the importance of analyzing the action of the Four Horsemen as a means of determining the speculative sentiment. The Horsemen are four issues considered institutional must-owns by large growth participants. Their behavior says something about the degree to which large players are willing to take on risk.

Two of the Horsemen, LinkedIn US:LNKD
and Netflix NFLX, -1.73%
are in short downtrends after last week's drop saw them match lows not seen in 10 and seven weeks, respectively. Coming into Monday, they ran the risk of rolling over anew. That LNKD found buyers shortly after the open, and that NFLX responded positively to a favorable article in the The Wall Street Journal and a JPMorgan upgrade of its price target, says something.

It has been noted that following an 8%-12% intermediate-term correction, it is the titles that snap back quickest to new-high ground that normally become your bona fide leaders on the next leg up in the averages. They bounce back like a tennis ball. By contrast, the issues that lay there lifeless when the averages rebound usually become laggards on the next market advance. They sit there like a broken egg.

Tennis balls or broken eggs. This is what determines leadership.

It is clear when looking at the speculative growth glamours which are the tennis balls and which are the eggs. CaesarStone Sdot-Yam CSTE, -2.51%Financial Engines FNGN, -1.85%
and Aegerion Pharmaceuticals US:AEGR
have shown little life in recent sessions, and should be avoided.

Biotechnology is being watched closely, as it has been an important driver of the move up in growth shares.

Among the names, Diamondback Energy FANG, -1.49%
an oil and gas explorer/producer in Texas, is expected by most analysts to post per-share net of $1.29 in 2013, up from a 99-cent-a-share loss in 2012. In 2013, FANG is expected to double earnings to $2.58 a share. Revenue growth has been impressive in recent quarters.

Technically, the stock has bounced back nicely in the last two sessions. It is four weeks into a basing pattern. A potential entrance would be above the Oct. 4 high of 47.36 for an aggressive speculator. (Note that the Oct. 4 high was created by testing prior resistance at 47.22, the Sept.13 high. It is common for the first test of resistance to be unsuccessful.)

Institutional participants remain interested in this market. The Nasdaq Composite flirts with its high of two weeks' prior, while most leading stocks maintain their composure. Using the tennis-ball test, it is clear which issues have leadership potential for the medium-term speculator. At the same time, it is important to maintain an open mind that is flexible to new technical developments.

The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and MIAC, held no positions, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position.

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